Output Gaps and Policy Stabilisation in Latin America: The Effect of Commodity and Capital Flow Cycles
24 Pages Posted: 14 Jun 2016
Date Written: June 2016
We provide a measure of the output gap that filters out the impact of the commodity and net capital inflows booms for Latin American countries. These two factors temporarily boost output and so are likely to push up estimates of potential growth in the region to unrealistic levels, thereby resulting in an underestimation of the output gaps during the upswing of the commodity cycle. We also shed light on the interaction between the two components. The results show that commodity prices has been the dominant factor explaining deviation of activity from sustainable levels. The timely consideration of these factors could prevent a procyclical fiscal policy bias in the region.
Keywords: output gap, commodity prices, capital flows, procyclicality, fiscal policy, Latin America
JEL Classification: E44, E52, E62, H30, H62
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